Is rental income taxable in Israel?
As a general rule, any income you earn from rental property in Israel is taxable. There are three tracks for the calculation of tax.
1. The Tax-Exemption Track
With the Tax-Exemption track, you are granted a tax-exemption or partial tax-exemption on rental income from residential real estate if certain cumulative conditions are fulfilled. The lower your rental income, the higher your tax exemption. For rental income up to NIS 5,471, there is a full tax exemption, and for rental income between NIS 5,471 to NIS 10,942, there is a partial exemption. These levels are updated every year.
The taxable portion of your rental income is taxed at the marginal tax rate of 31% (i.e. the minimum tax on “passive” income that is not the result of work.) However, if you are aged 60 or above, there is a gradual reduction of this tax rate. In this track, it is possible to write off expenses (not depreciation) on the property, but this must be proportionate to the exemption you are entitled to.
2. Reduced Tax Track
In the Reduced Tax Track, you pay a fixed tax rate of 10% on all residential rental income, regardless of how much you earn. It is not possible to deduct any expenses in this track such as repairs, legal fees, management fees, etc.
3. Tax Brackets Track
In this track, your marginal tax rate applies, which is based on your entire income. The first tax bracket is 31%, unless you are 60 or older, in which case your first tax bracket is 10%. This option allows the deduction of relevant expenses associated with the rental and it may also be possible to claim depreciation against the rental income when sold. With this option, you are required to file an annual report with the Israel Tax Authority.
As a real estate investor or owner, you may choose the track that is most favorable to you each year, provided you fulfill the relevant criteria. If you own several apartments you may take advantage of a full or partial exemption on certain apartments and choose to pay a reduced tax on other apartments.
It is important to note that according to the Supreme Court ruling and the Tax Authority’s position, if you rent more than 10 apartments you are considered to be running a business for apartment rentals and are charged income tax according to the income tax brackets for businesses. If you rent 5 apartments or less you are not usually considered a business owner, but someone who rents between 6 to 10 apartments will be examined individually by the Tax Authority.
VAT on rental income
It should also be noted that VAT is not applied to residential rentals where the term is less than 25 years (excluding hotels and tourist accommodation).
Foreign residents and rental income
As a foreign resident, you are obligated to pay income tax on rental income earned in Israel, and may also be obligated to pay tax in the country you reside.
This guide is intended to provide the reader with general information and not to serve as legal or other professional advice. Readers are advised to obtain advice from qualified professionals before entering into any real estate transaction.
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